Tax loss on NUA stock
Assume an employee has NUA stock in his company’s retirement plan with a basis of $15 per share. The stock currently has a market value of $10 per share.
If the employee takes the stock in a lump-sum distribution, pays the tax on the $15 basis, and then sells the stock, would he be able to recognize a $5 loss, and would it be considered short-term or long-term?
I seem to remember seeing a notice or ruling from the IRS discussing this sort of unusual scenario, but I haven’t been able to find it again.
I can’t say I see any benefit to this strategy. It seems to me it only makes sense for the employee to take distribution of the stock if he intends to hold it in anticipation of appreciation back over the $15 basis. If the goal is simply to surrender the stock at distribution, he would do just as well to roll the stock to his IRA, liquidate it and pay tax on the value received. That way he would pay tax (and possibly penalty) on the stock basd on the $10 market value, not the $15 basis,m and would avoid the complications of additional tax reporting relating to the stock sale.
However, I am trying to see if anyone can provide a reference to any IRS guidance that goes beyond the standard NUA scenario.
Permalink Submitted by Clyde Wolf on Fri, 2011-05-27 15:37
Nua = Net Unrealized Appreciation.
If the stock in the 401k plan when distributed, is worth less than the market value there is no Appreciation to use to take advantage of the lower Capital Gains Tax rate.
Then as you ask, why bother with the NUA unless you expect the stock value to increase, or you want to create a Capital Loss.
Stock distributed from the 401k plan is generally long term. Recently acquired shares would be short term holdings.
Permalink Submitted by Alan Spross on Fri, 2011-05-27 19:06
While there is no benefit to doing that, the point is moot because there is no way of recognizing any negative NUA, or of reporting same on Sch D and Form 1040. Therefore, negative NUA (depreciation) does not exist.
Per the 1099R Instructions:
The 1099R for a normal NUA situation will show the amount of NUA in Box 6, and that amount will be subtracted from the Box 1 gross distribution to produce the taxable cost basis in Box 2a. A negative amount cannot be shown in any of the 1099R boxes, so when there is no Box 6 amount, Box 2a will equal Box 1 and taxes will be paid on the gross distribution ie. the $10 per share value. Positive Box 6 NUA must exist before Box 2a can be less than Box 1. For that to happen the FMV of the shares must exceed the $15 cost to the plan.
Above example assumes that there is no after tax contributions made allocated to the purchase of the shares. If there were, the Box 2a figure would be reduced accordingly in addition to the above example.
If there IS NUA in Box 6, it is considered LT gain when the shares are sold even if the shares were purchased in the plan, distributed, and sold in less than one year.
Permalink Submitted by [email protected] on Thu, 2021-09-09 13:19
I’m working on a situation like this, where the client has employer stock that has depreciated in value. If the account was funded with after-tax money, what would that look like? In the above scenario, box 1 would be $10, box 6 would be $0, and box 2a would also be $0 since after-tax? Does the fact that it is after-tax dollars impact the cost-basis in the taxable account or is it still $10? Is there any way to claim the $5 loss? Kitces makes the following comment in his article which I find confusing. “If shares are held past the distribution date and losses occur, it will simply reduce the amount of net unrealized appreciation gain reported on the sale (although if losses cause the price to fall all the way down below the original cost basis, a capital loss can be claimed).” https://www.kitces.com/blog/net-unrealized-appreciation-irs-rules-nua-from-401k-and-esop-plans/Can a loss be claimed only on the amount of depreciation that occurs in the taxable account – not the depreciation that occurred while in the retirement account?
Permalink Submitted by Alan - IRA critic on Thu, 2021-09-09 15:41
Before the LSD, the application of after tax contributions to NUA shares depends on the plan’s provisions for applying. Some plans will allow the participant to choose to apply after tax contributions to the NUA shares or other portions of the plan. Most apply it to the cost basis for the NUA shares, which will reduce the Box 2a amount first. But I think your question refers to selling shares in a brokerage account after the LSD. The cost basis in the brokerage account is not affected by whether the shares were purchased in the plan with after tax dollars or not. It is based on the gross value at the time of the LSD and will be composed of two parts, the basic cost basis per share and the NUA per share. As Kitces states, post LSD losses reduce the NUA per share (the amount of LT gain). It is very rare that the value would drop enough to erase the entire NUA and more, since most people will not choose the NUA option if the NUA per share is under roughly 70% of the gross value. However, should this occur, a cap loss could be claimed on Form 8949 for the value reduction below the non NUA cost basis at the time of the LSD, so I agree with Kitces and such a loss could be claimed after all NUA had also be erased by losses.